Growing struggle for owners of flats trading up

Owners of flats are increasingly struggling to progress up the housing ladder as high mortgage interest rates and slow price growth in the segment have raised the barriers to buying a house. 

The length of time it takes owners of flats in England and Wales to upgrade to a house has lengthened significantly over the past five years as house price growth has far outstripped that of flats, research has found.

Amid a wider recent slowdown in transactions and prices, estate agent Hamptons found sellers who sold their flats in 2022 after buying five years earlier had seen the value of their home rise by 13 per cent on average. But house owners saw a gain of 36 per cent over the same period. 

This means it was taking longer for flat owners to build enough equity in their homes to make the next move to a bigger home. One-third of flat sellers in 2019 had bought five years previously — but that proportion had fallen to a quarter by 2022. 

More recently, soaring mortgage rates have added to the problem facing aspiring house buyers. Average five-year fixed rates have moved from between 1 and 2 per cent in 2021 to 5.63 per cent this month, according to finance website Moneyfacts. 

Aneisha Beveridge, research director at Hamptons, said the average house seller in 2022 saw a gain of 50 per cent or more over seven years of ownership, but it had taken the average 2022 flat seller 18 years to see the same level of growth.

This had left a dearth of flat sales compared with houses, as flat owners are forced to wait longer before moving. “If flats had sold at the same rate as they had pre-Covid, we think there would have been around 100,000 additional flat sales in 2021 and 2022,” she said, adding that the phenomenon of “missing” flat sales was likely to continue into 2023.

However, the gap between flat and house gains is likely to begin narrowing under cyclical pressures, Beveridge said. Many first-time buyers in the past decade had taken advantage of cheap borrowing to buy the biggest possible home they could, to avoid the transaction costs of trading up every few years. In cheaper areas of the UK, this may have meant their first property was a house.

“We now know first-time buyers are going to be hard hit by the cost of living crisis and everything in between. We think that they might actually compromise on space and are now more likely to go back to buying flats,” she said.

Figures from Nationwide on Friday showed the rising affordability crunch facing first-time buyers. Based on someone buying with a 20 per cent deposit, it found mortgage payments as a percentage of take-home pay had risen to 39 per cent over the past 15 months, up from their long-term average of 29 per cent. 

The payments burden is leading to higher arrears, according to the Financial Conduct Authority. Writing to the House of Commons Treasury select committee this week, it said 200,000 households had fallen behind on their home loans by the middle of 2022. A further 570,000 households risked falling behind on payments within the next two years, it added.

Paying the mortgage is one factor; raising a deposit for purchase is another. House prices rose by 19 per cent between the start of the pandemic in March 2020 and the end of 2022 but “incomes rose by a much more modest 9 per cent”, said Andrew Harvey, senior economist at Nationwide. This had piled pressure on first-time buyers’ ability to save for a housing deposit.

“A 20 per cent deposit on a typical first-time buyer home is now equivalent to 112 per cent of the pre-tax income of a typical full-time employee,” he said.